Why Do Banks Require Bank Counsel On Some Commercial Loans? - June 2016
I have been representing both borrowers and lenders on commercial transactions for over 30 years and I have frequently encountered this question from borrowers: Why does the bank need its own attorney in the transaction when the borrower is represented by counsel? Implicit in this question is the truism: Borrowers do not like to pay the legal fees of their own lawyer and they certainly don't like to also have to pay legal fees for the bank's attorney. The following are some practical tips designed to explain the role of bank counsel.
Why is Bank Counsel necessary?
The answer to this question is, quite simply, the bank needs to insure that, if the loan goes into default, the bank's interests are properly protected. Stated differently, in a default scenario, the bank needs to be sure that the documentation describing the loan and the collateral documents securing the loan provide the bank with the best available means of recovering as much as possible of the outstanding balance due under the loan.
Is Bank Counsel a requirement on all commercial loans?
No. Each bank has different criteria to determine when bank counsel will be required. Frequently the size or complexity of the loan will determine if the bank will require bank counsel.
Who is the Bank Counsel?
Most commercial banks have a list of attorneys with whom they have established a relationship over the years who are experienced in handling commercial transactions.
What does the Bank Counsel do?
The role of bank counsel in a commercial loan is, primarily, to insure that the documentation utilized for the loan: is consistent with the loan terms; properly protects the bank; and is properly executed by all necessary parties. Depending on the collateral package for the loan, bank counsel may also need to review the title insurance commitment and exceptions to title pertaining to any real estate which is collateral for the loan and also a UCC search if personal property is additional collateral for the loan.
Who pays the legal fee of Bank Counsel and how is that legal fee determined?
Customarily, the legal fee of bank counsel is paid by the borrower at settlement as a cost of the transaction similar to the fees paid to an appraiser; surveyor; or environmental engineer. In most cases, bank counsel will charge by the hour for their time spent working on the transaction.
How does Bank Counsel interact with Borrower's Counsel?
In most cases, bank counsel is, in essence, looking over the shoulder of the borrower's counsel and is reviewing the work done by borrower's counsel. I have found that the amount of time spent by me as bank counsel (i.e. which translates into the amount of bank counsel's legal fee) is closely related to the experience of borrower's counsel. Sometimes, borrowers will use a friend or acquaintance as their closing attorney who may be very competent in other areas of the law but has very limited experience in closing a commercial loan. In this instance, the bank counsel may have to spend a great deal of time revising or rewriting much of the work done by borrower's counsel in order to be sure that it is done correctly. Therefore, I recommend that borrowers hire an attorney to represent them in their transaction who is experienced in commercial work.
Why can't one lawyer represent the interests of both the Bank and the Borrower?
Although the bank and the borrower have some identity of interest in the transaction, i. e. getting the deal closed, in most cases there will be an ethical conflict of interest with one attorney representing both the bank and borrower. The borrower is primarily interested in completing the transaction and receiving its proceeds. The bank, of course, also wants the loan to close but is also focused on insuring it is properly protected in the event of default. When I am serve as bank counsel, I attempt to establish, at the outset, a division of labor and a rapport with borrower's counsel with the idea that, although we each need to represent our respective client's best interests, we also have a common goal in getting the loan closed properly and on time. Similarly, when I represent a borrower in a commercial loan, I can usually anticipate what the bank's counsel will be looking for in terms of documentation and I try to satisfy the requirements of the bank and the title company as quickly as possible to minimize the time spent by bank counsel.
Summary
Borrowers need to expect that, on larger commercial loans, their bank will require bank counsel to work on the project and that the fees of bank counsel will be an additional closing cost of the borrower. An awareness upfront of the need and role of bank counsel allows the borrower to budget for the expenses of bank counsel and reduces the risk of surprise and hard feelings at closing.
James B. Lonergan, a Pender & Coward shareholder, focuses his practice on commercial real estate, banking and commercial transactions. Contact him with questions by calling (757)490-6281 or by sending an email to jlonerga@pendercoward.com.
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